Yacktman Wins as Heebner Is Too Volatile; Investors rewarded Yacktman, who employs an old-school buy- and-hold strategy, with a wave of deposits that helped swell his fund’s assets almost 30-fold in the past four years

Yacktman Wins as Heebner Is Too Volatile: Riskless Return

Donald Yacktman and Kenneth Heebner both crushed fund rivals over the past 13 years, racking up big gains in an era when stocks went sideways. The difference is Yacktman gave investors a smooth ride, Heebner anything but.

From March 2000 through last month, a span in which the Standard & Poor’s 500 Index returned less than 2 percent a year amid two bear markets, Heebner’s $1.5 billion CGM Focus Fund (CGMFX) had the best gain among large mutual funds that buy U.S. stocks. His clients had to stomach the highest volatility, as the fund went from an 80 percent jump in 2007 to a 48 percent drop in 2008. The $9.6 billion Yacktman Fund (YACKX), fifth by total return, avoided much of the roller-coaster ride to produce the top risk-adjusted return, according to the BLOOMBERG RISKLESS RETURN RANKING.

Investors rewarded Yacktman, who employs an old-school buy- and-hold strategy, with a wave of deposits that helped swell his fund’s assets almost 30-fold in the past four years. The rapid- trading Heebner suffered redemptions that chopped his fund’s size by almost two-thirds since 2008, as customers fled in response to what he calls “lumpy” performance. Read more of this post

François Sicart: The Value Investor’s Schizophrenia: Buy-and-Hold Sounds Good, but the Value Discipline Requires One Also To Sell

The Value Investor’s Schizophrenia: Buy-and-Hold Sounds Good, but the Value Discipline Requires One Also To Sell

Superstar investor Warren Buffett is widely quoted as having said, “The best time to sell a stock is…never.”

But Buffett, while a proclaimed disciple of Benjamin Graham, the “pope” of value investing, was later just as much influenced by Philip Fisher, the recognized “pope” of growth investing. In fact, it was Fisher who, in Common Stocks and Uncommon Profits (Harper, 1958), wrote that the best time to sell a stock was “almost never.”

I never met Ben Graham, and have not met Warren Buffet. But I did meet Phil Fisher, who invited me to visit a company with him after reading one of my papers, sometime in the 1980s. Without even a quote machine in his office, he was a voracious reader of company financials, but also a compulsive evaluator of corporate management. He wanted to know and talk to everyone he could in a company, from CEO to operations personnel; and once convinced that a management was among the best, he was willing to pay almost any price for the shares. If he overpaid, his logic went, the company’s earnings growth would make up for it over the ensuing years.

It is not clear that Warren Buffet puts the same premium on superior management. In a May 20, 2008, statement to the Associated Press, he even advised, “Buy into a business that’s doing so well an idiot could run it, because sooner or later, one will.”

This, by the way, was probably inspired by a similar comment from legendary growth investor Peter Lynch in his 1989 book, One Up on Wall Street (Simon & Schuster, 2000), so the feeling does not belong only to value investors.

Clearly, Buffet has retained a great sense of value. But nowadays his philosophy – probably imposed in part by the trading and liquidity restrictions of a very large portfolio – seems closer to that of Philip Fisher, as exemplified by this quote from his 1989 Letter to Berkshire Hathaway Shareholders: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Personally, I am still more at ease with the value discipline of investment: I feel more comfortable estimating a company’s reasonable worth than putting a dollar value on the quality and future achievements of its management. In addition, the contrarian bias of value investing also pleases me, since it means seizing occasions when the price the investing crowd is willing to pay for a stock is well below its value. Read more of this post

A Wonderful Lesson From Warren Buffett That Explains One Of The Biggest Mysteries About Amazon; Novy-Marx (2012) shows, however, that a simple quality metric, gross profits-to-assets, has roughly as much power predicting the relative performance of different stocks as tried-and-true value measures like book-to-price

A Wonderful Lesson From Warren Buffett That Explains One Of The Biggest Mysteries About Amazon

Joe Weisenthal | Mar. 2, 2013, 8:53 AM | 16,147 | 21

Warren Buffett is known as the world’s most famous “value investor,” but that term is not well understood.

In his latest letter to shareholders (.pdf), Buffett includes a great paragraph explaining that value is not synonymous for cheap.

More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes reverted to my old habit of bargain-hunting, with results ranging from tolerable to terrible. Fortunately, my mistakes have usually occurred when I made smaller purchases. Our large acquisitions have generally worked out well and, in a few cases, more than well.

As Charlie Munger evidently taught Buffett, it’s better to buy high-quality businesses for a fair amount than finding assets at bargain basement prices. Read more of this post

Warren Buffett may be souring on stocks; The Oracle of Omaha still likes the market — but he’s hardly pounding the table

Warren Buffett may be souring on stocks

By Stephen Gandel, senior editor March 1, 2013: 4:03 PM ET

The Oracle of Omaha still likes the market — but he’s hardly pounding the table.

FORTUNE — In his annual letter to Berkshire Hathaway (BRKA) shareholders, released Friday afternoon, Buffett says he still believes U.S. stocks will “do well.” He notes that he made his first stock purchase during the bleakest part of World War II, so even if things look not so great right now, you should end up doing fine as well. But compare that to last year’s letter. Buffett devoted three and a half pages – over 1,900 words – to a detailed explanation of why he thought stocks were a much better investment than say gold or bonds. (See Warren Buffett: Why stocks beat gold and bonds.) He also said he was bullish on U.S. housing. This time around he devotes four paragraphs to the case for stocks. And even in that small space, Buffett says that investors should expect periodic setbacks, and he includes two statistics that could signal one may be coming up sooner rather than later. Buffett points out that the Dow Jones Industrial Average rose “a staggering” 17,320% in the 20th century — despite “four costly wars, a Great Depression and numerous recessions.” Here’s the problem: During nearly the same period, Buffett says GDP per capita rose much less about 500%. Buffett has used this comparison of the economy to stock market valuations before. He featured the metric in a story he wrote for Fortune back in 2001. (See Warren Buffett on the stock market) By that time, stocks had already fallen a bit from their dot-com infused highs. But they still weren’t a buy, Buffett said at the time. Despite their fall, stocks collectively were trading at a value of 133% of the gross national product of the U.S. (Buffett used GNP because it goes back 80 years, but for recent history using GDP works just fine.)

So where are stocks trading today? You guessed it. 133% of GDP. The metric hit a high of 190% back in 1999. So we are a little ways from panic territory, but that doesn’t mean the market is a safe place to be right now. Far from it. Back in 2001, Buffett said investors who buy when the relationship of stock values to the economy falls in the 70% to 80% range should do well. That means stocks would have to plummet 43% before we are back in Buffett buy territory. Even so, Buffett doesn’t appear to be worried. In his own portfolio, Buffett in the past year has added to his stakes in Wal-Mart (WMT) and Wells Fargo (WFC), two companies that are likely to go up only if the economy and the rest of the market does as well. It’s hard to tell if that’s because Buffett believes stocks are cheap, or just because he believes the other investing options are worse. “The risks of being out of the [stock market] game are huge compared to the risks of being in it,” writes Buffett in the letter. “Every tomorrow has been uncertain.”

Buffett: $24 Billion Gain ‘Subpar’; Berkshire Boss Says He Is Donning His ‘Safari Outfit’ as He Continues the Hunt for Big Acquisitions

Updated March 1, 2013, 6:58 p.m. ET

Buffett: $24 Billion Gain ‘Subpar’

Berkshire Boss Says He Is Donning His ‘Safari Outfit’ as He Continues the Hunt for Big Acquisitions

By ANUPREETA DAS And ERIK HOLM

Warren Buffett bemoaned Berkshire Hathaway Inc.’s BRKB -0.11% failure to land a major acquisition during 2012 to use its swelling cash hoard, and in his annual letter to shareholders called his company’s performance “subpar” despite a $24 billion increase in its net worth. The value of the Omaha, Neb., company rose 14% in 2012, Berkshire said Friday, compared with a 16% total return in the Standard & Poor 500-stock index, including dividends. But Berkshire’s ballooning size means that keeping up with the market continues to get tougher, as Mr. Buffett has long warned it would.

“When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar,” Mr. Buffett, Berkshire’s chairman and chief executive, said. “But subpar it was.” The lagging performance is just the company’s ninth in the 48 years that Mr. Buffett has steered the company, but the third in four years. If the stock market continues to advance in 2013, it could jeopardize his streak of beating the S&P on a rolling five-year basis, as Mr. Buffett said Berkshire’s relative performance is stronger when the market is down or flat.

Not landing a large deal in 2012 was another disappointment, Mr. Buffett said: “I pursued a couple of elephants, but came up empty-handed.” Two years ago, he said he was on the prowl for big deals as a way to boost returns on Berkshire’s billions of dollars in cash. At the time, Mr. Buffett said, “Our elephant gun has been reloaded, and my trigger finger is itchy.” Read more of this post

Shares of the fallen doughnut maker Kripsy Kreme have risen from a buck and change to about $13 in four years

Krispy Kreme’s Unlikely Comeback

By Roben Farzad on February 22, 2013

In the three years following Krispy Kreme Doughnuts’ (KKD) initial public offering in 2000, its shares soared 840 percent, despite a bear market. Back then, everyone wanted a bite of the Winston-Salem (N.C.) doughnut maker: Baseball great Hank Aaron scored a franchise in Atlanta, and American Bandstander Dick Clark lobbied unsuccessfully for a Times Square concession. In 2003 the cover of Fortune magazine anointed Krispy Kreme “America’s hottest brand.”

The hot-glazed hype peaked just as the Atkins diet and its carbophobia took hold. It didn’t help that Krispy Kreme alienated its franchisees by skimping on brand promotion. And when rival Dunkin’ Donuts (DNKN) reinvented itself as a top destination for coffee, its Southern rival failed to serve up a competitive brew.

Short-sellers swarmed Krispy, and were vindicated in 2004 when the company reported its first quarterly loss since going public. Later that year, the Securities and Exchange Commission opened an inquiry into accounting irregularities. As stores shut down and rumors of bankruptcy swirled, the market increasingly saw Krispy Kreme as another fast-food flameout. The stock hit bottom at $1.08 four years ago.

A lot has changed since. Krispy now trades for $13.25 a share, up more than 60 percent from a year earlier. New management has returned the company to profitability after 14 quarters of losses. International franchises kicked in $4.3 million in operating income in Krispy’s latest quarter; in the U.S., where the company owns many of its stores, franchises contributed just $1.2 million. An appreciation for fried dough, it seems, transcends cultural barriers, with appetite for Krispy Kreme’s flagship product particularly strong in Asia and the Middle East. Backed by a 12 percent equity investment from Kuwait’s Al Kharafi family, the company last year set a target to increase franchises abroad to 900 stores by 2017 from 506 now. At home, the chain hopes to expand to 400 U.S. stores from 240 over the same period. Read more of this post